The development trinity: How regional integration impacts growth, inequality and poverty

• Date: 01 July 2019
• Published date: 01 July 2019
• Author: Alisa DiCaprio,Amelia U. Santos‐Paulino,Maria V. Sokolova
• DOI: http://doi.org/10.1111/twec.12788

ORIGINAL ARTICLE

The development trinity: How regional integration

impacts growth, inequality and poverty

Amelia U. Santos-Paulino

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Alisa DiCaprio

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Maria V. Sokolova

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1

Division for Africa, Least Developed Countries and Special Programmes, Geneva, Switzerland

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R3, New York City, New York, USA

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Division on International Trade and Commodities, UNCTAD, Geneva, Switzerland

KEYWORDS

free trade agreements, growth, inequality, least developed countries, low-income countries, panel data, poverty, regional

integration

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INTRODUCTION

Regional trade agreements (RTAs) can be a useful tool to promote growth and development.

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They structure trade in a way that can increase domestic productive capacity, promote upward

harmonisation of standards, improve institutional quality, introduce technical know‐how and

increase preferential access to desirable markets. These are outcomes that could benefit develop-

ing economies in general and particularly least developed and low‐income countries.

However, most studies of RTAs show that, on average, less developed countries benefit less

(see, e.g., Ariyasajjakorn, Gander, Ratanakomut, & Reynolds, 2009; Feenstra, 1996). Also, while

RTAs can lead to convergence, some research shows that the poorer countries in a regio n are more

likely to diverge (e.g., Venables, 1999).

Moreover, non‐economic impacts of trade agreements may also be problematic for developing

countries. While RTAs have the potential to promote higher standards for labour, environment, trans-

parency and other progressive reforms and non‐economic policy objectives; this comes with concerns

about policy sovereignty and the balance between commitments and flexibility. And RTAs may erode

non‐reciprocal preference schemes such as the Generalised System of Preferences or special and differ-

ential treatment for LDCs, without providing affected countries with the opportunity to find solutions.

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Despite this uneven distribution of benefits, most developing countries are members of at least

one RTA.

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Policymakers view RTAs as the de facto way to access the global trade regime.

[Correction added on 8 May 2019 after first online publication: The Acknowledgement section was previously omitted and

has been added in this version.]

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Regional trade agreements are defined as any agreement involving tariffs lower than most‐favoured nation rates.

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See Bagwell and Staiger (2001) for a related discussion about national policies in the context of international economic

institutions.

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Forty‐eight countries are currently designated by the United Nations as “least developed countries”(LDCs), entitling them

to aid, preferential market access and special technical assistance, among other concessions. The regional distribution of

LDCs is as follows: 34 in Africa, 9 in Asia, 4 in the Pacific and 1 in the Caribbean.

Received: 28 February 2018

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Revised: 18 January 2019

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Accepted: 22 January 2019

DOI: 10.1111/twec.12788

World Econ. 2019;42:1961–1993. wileyonlinelibrary.com/journal/twec © 2019 John Wiley & Sons Ltd

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However, the reality is that most RTAs are South–South agreements,

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which are often

poorly implemented and are unlikely to help members ramp up their participation in the global

trading system.

The literature is controversial on the benefits of regionalisation and their de facto dist ribution.

Thus, this paper aims at empirically investigating the impact of regionalisation on key development

outcomes, for different development clusters. In particular, we explore the hypothesis that regional-

isation has a non‐linear impact on economic growth, inequality and poverty for developing coun-

tries. We explore this question on both national and regional levels.

The key contribution of the paper is the introduction two measures of regional integration,

which simplify the complicated impacts of regionalism into easily measurable and descriptive

indices. The first measure defines regionalisation as a sovereign country trade policy tool by using

bilateral trade linkages among states. The second measure gauges the weighted regionalisation of

trading partners, which captures the extent to which a country is engaged in the regional networks

of other countries. This regional dimension of analysis has received scant attention in the literature,

despite the evidence of “bowls”and “nets”of trade agreements which imply a domino effect when

one country enters into a trade agreement.

Our results show that both a country's own regionalisation and its exposure to the regionalisa-

tion of others positively contribute to economic growth globally. However, the findings vary by

regional clustering, with some areas such as sub‐Saharan Africa having experienced relatively

lower growth as a result of internal regionalisation and exposure to external regionalisation. In

addition, economic growth results in positive distributional outcomes in the developing country

clusters that are involved in more regionalisation, compared with the rest of the world. Overall, we

observe that location in a region that is characterised by more frequent RTA participation has

higher growth, a smaller increase in inequality and a reduction in poverty when regionali sation

increases among the participants.

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Section 2 addresses these conclusions in light of the exiting lit-

erature. Section 3 then presents our empirical approach to measuring the impact of regional inte-

gration on development and describes the data. Section 4 presents the results of the empirical

estimations. Section 5 concludes.

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LITERATURE REVIEW

In Viner's time, RTAs were about trade liberalisation. As a result, much of the early literature

focused on the trade outcomes of tariff reductions. This early literature informs our hypothesis that

the RTAs will impact both members and non‐members. Unlike much of the existing trade litera-

ture, our analysis pulls together four very different sub‐literatures in the trade space. These areas

have developed separately in part due to the multidirectional impacts of trade. In this section, we

weave these together to illustrate how our analysis expands, questions and disputes earli er

findings.

Both our empirical strategy and our premise that changes in trade are impacted by both mem-

bers and non‐members are rooted in the trade and growth literature. This recognised early on that

both members and non‐members of trade agreements are impacted by their implementation. Early

contributions include Viner (1950), Lipsey (1960), Corden (1972) among others. Based on Viner's

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See Figure A1 in the Appendix.

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Baldwin (2006) referred to the well‐known puzzle of overlapping RTAs described by Bhagwati (1991) as “spaghetti bowl”

to describe the proliferation of trade agreements in Asia.

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SANTOS‐PAULINO ET AL.

two‐goods model, the main effects of a custom union are threefold: first a production effect, that is

trade creation and trade diversion; second, consumption effects; and, third terms of trade changes

with the rest of the world. Corden (1972) incorporates economies of scale into customs union the-

ory, incorporating cost‐reduction and trade‐suppression impacts to the standard Vinerian concepts.

And, Corden (1974) proposes a theory of domestic divergences which provides a rationale for gov-

ernment intervention to increase welfare by offsetting the effects of distorting policies or of market

imperfections. Other, more complex taxonomies propose further effects working through import

and export diversion, and import–export substitution within members. Some authors, for example,

Rodrik (2018), argue that looking only at trade creation and diversion is an insufficient way to

evaluate RTAs.

From here, our work delves more deeply into the question of how different patterns of engage-

ment impact domestic welfare outcomes. This diverges from the empirical trade and growth litera-

ture which has attempted to analyse the effects of FTAs in terms of trade creation and trade

diversion (see, e.g., Baier & Bergstrand, 2007).

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Magee (2008) controls for exporters’and impor-

ters’fixed effects along other vectors of unobserved characteristics between countr y pairs, to over-

come the structural problems of standard gravity models. According to his paper, aggregate shocks

to a country's imports can be large relative to the effects of a regional trade agreement; thus, it is

challenging to determine a counterfactual level of trade that would have occurred in the absence of

the agreement, and hence, the trade diversion effect is not evident. The findings also point out that

the effects of an agreement can vary considerably across countries within a trade block, and the

impact of the trade preferences can change over time. Dai, Yotov, and Zylkin (2014) find that

FTAs divert FTA member imports away from non‐member countries. Furthermore, FTAs lead to a

larger‐still decrease in internal trade—that is, domestic sales—within member countries. The diver -

sion of internal trade intensifies with the number of FTAs a given country pair.

Our focus on the lower‐income members of RTAs and the domestic gains that are possible

through their international agreements takes its inspiration from the recent literature, which has

suggested that regional agreements may be beneficial or harmful depending on the particular coun-

tries involved, and the extent of trade creation relative to trade diversion (Panagariya, 2000).

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Importantly, the net impact of a regional trade agreement for its members will depend on their ini-

tial economic structure and parameter values, and such is essentially an empirical issue that must

be determined by data analysis (Burfisher, Sherman Robinson, & Thierfelder, 2001).

Our empirical strategy uses two estimation techniques from previous studies on changes in

trade patterns. First, ex‐post studies examine trade flows after the RTA has been implemented and

compare the actual levels of trade with a prediction of trade in the absence of the RTA. Second,

ex‐ante studies use trade patterns and estimated elasticities or computable general equilibrium mod-

els prior to the agreement to calculate the predicted impact of eliminating trade barriers with a

partner country. However, as both approaches are subject to criticism (Magee, 2008), we use panel

data analysis to look at the short and long‐term impacts of our novel measures of regional integra-

tion and the development trinity of growth, inequality and poverty.

Our measurement of non‐member country effects is directly in line with existing studies. One

difference is that existing work has focused largely on trade outcomes such as price effects and

terms of trade impacts (see, e.g., Winters & Chang, 2002) as well as the effects on economic

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Gravity models have been subject to extensive criticism. However, the review of such models is beyond the scope of this

paper. Anderson (2011) provides an extensive review of the gravity models of international trade.

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Panagariya (2000) provides an extensive survey of the topic.

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